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Brenthurst Wealth Management (PTY) LTD FSP No. 7833

September 2017 - Issue 275

SEPTEMBER 2017 • ISSUE 275

BRENTHURST RANKED TOP BOUTIQUE WEALTH MANAGER IN SA, 2017

CONTACT US

1. BAD DEBT

2. RETIREMENT ANNUITIES

3. DONATION BETWEEN

4. INVESTMENT WRAPPER

A projected revenue shortfall of about R44bn for the 2017 fiscal year was big news in recent weeks. This is widely expected to affect South Africa’s credit rating and will create a major challenge for Treasury. In simple terms there are only two options; cut state spending or raise taxes. It is the second option that is of concern for tax payers as rates were already increased across various forms of tax when the 2017/18 Budget was announced in February. But with careful planning there are ways to manage tax efficiency. All individuals are different and I feel there should be some sort of pecking order for all individuals to follow when handling investments. Let’s face it, not all individuals are business owners, nor have they the ability to emigrate, or have wealthy families that will support them. The fact is, most South African’s are in the same boat – you must plan and save for your own wealth and retirement, no one else will!

This includes credit cards, vehicle debt and study loans. Aim to pay these off as soon as possible, as you are effectively guaranteed a higher return compared to any guaranteed investment return on the market. A primary residence is not necessarily considered a bad debt; it does, however, make sense to repay a home loan as fast as possible in view of the current low growth environment. By paying off a bond, you are effectively guaranteed a return of 10-13%, depending on your marginal tax rate. A note on investment properties – in certain circum-stances it makes sense to delay and keep a bond as big as possible. Interest on such loans is tax deductible and paying it off could create an increased tax liability. The concept of gearing is a terrific way to build wealth, however, choose the location wisely.

By Johan Burger, CFP® Professional and Director, Brenthurst Wealth

:

BAD DEBT

RULES TO CONSIDER:

①

DONATION BETWEEN INDIVIDUALS

We find many instances of donations between spouses when one of them is not earning an income. We also find that most investments are then just in the name of the one working or the one earning the highest income. CONSIDER THE FOLLOWING: Donations between spouses are free of any donations tax. Therefore, by donating an amount from one party to the other will allow that both can utilise their annual exemptions - currently R23 800 for interest (65 and younger) and R34 500 (65 and older). Both will also then be allowed an annual capital gain exemption of R40 000. By investing the largest amounts in the individual’s name with the lowest tax rate will save quite a bit on their total household tax liability.

I would say the most important asset for individuals

is the ability to work and generate income. Most

investors forget that a pension will serve that

purpose. The fact that the investment is fixed until

age 55 or beyond, is, in my opinion, a good thing.

It may be generalisation but many individuals do not

have the discipline and use savings on luxury goods

and forget the main objective:

A pension is to provide an income for the day you

are not working anymore. Although there are

constraints with asset allocation, benefits indicate

that RA’s form a vital role in tax and retirement

planning.

RETIREMENT ANNUITIES

A LOT HAS BEEN SAID ABOUT RETIREMENT ANNUI-TIES. IS IT WORTH IT? ASSET ALLOCATION AND LIQUIDITY CONSTRAINTS? Can only invest in a certain way – (Regulation 28) which effectively means that an investor may only have exposure to 75% in equities, only 25% to listed property and only 25% offshore. The fact is that a retirement annuity is a very tax effective retirement saving investment vehicle. Any amounts contributed in total to a pension fund, provident fund or retirement annuity are tax deductible but limited to 27.5% of the greater of remuneration or taxable income. This is limited to a maximum of R350 000 per annum. Any excess contributions are carried forward.

Brenthurst Wealth Management (PTY) LTD FSP No. 7833 September 2017 - Issue 275

ADVANTAGES INCLUDE: No income tax on growth, no capital gains tax

or dividend withholding tax. Does not form part of an estate – therefore no

estate duty or executor fees. Get a massive tax deduction. (If for every R100

you earn and if you contribute R27.50; you only pay tax on R72.50).

Protected from creditors. DISADVANTAGES: Money is fixed until age 55. Only 1/3 available at retirement as lump sum. Income after retirement is taxable.

Donation tax is currently levied at 20%, however, every individual can donate R100 000 annually. This is an effective way for parents to annually reduce their estate. This method can be utilised to invest for children in tax free savings accounts as mentioned earlier.

③

②

This tax implication will play a vital role in the protection of capital and the real buying power of any investment, especially taking inflation into consideration. Investments will not keep up with inflation with current tax rates, let alone pure money market investments. Individual investors with large portfolios and all current trust investments should and in my opinion, MUST consider the following. Invest in an investment wrapper or Access vehicle.

WHO CAN INVEST?

Individuals and Trusts

GENERAL TAX BENEFITS; Investors with tax rates greater than 30% will

benefit from this investment.

For individuals and trusts (with natural persons as

beneficiaries) income tax of 30% and CGT of 12% is

applied to the policy. The individual interest and CGT

exemptions are not utilised, so remain intact.

One of the most prominent changes in this year’s budget has been the increase of income tax for wealthy individuals earning more than R1.5 million per year (41% to 45%). The effective capital gains tax rate increased from 16.4% to 18%. Marginal rate for trusts increased to 45% with an effective CGT rate of 36%. Is it still worth it to set up a trust? That is a topic all of its own and will not be covered here – a debate for another day.

CAPITAL GAINS TAX INCREASES OVER THE YEARS – Is this just the beginning? What we can expect for the future?

HOWEVER BENEFIT OF POLICY WRAPPERS HAS INCREASED DURING THIS TIME

INVESTMENT WRAPPER/ ACCESS INVESTMENT


④

SOU

RC

E IN

VES

TEC

ACCESSIBILITY Withdrawals are restricted during the first five

years (one interest-free loan and one surrender);

however, after five years regular withdrawals are

allowed. Withdrawals during the five-year

restriction period are limited to premium/ contri-

butions made plus 5% compound interest per

annum.

BENEFITS AFTER END OF RESTRICTION PERIOD

After the end of the five-year restriction period,

being able to make regular withdrawals can have

tax benefits. If an investor is making regular with-

drawals from the Access policy to supplement

their annuity income, the annuity income can be

reduced. A reduction in annuity income, which is

subject to tax at the investor’s marginal rate, will

result in a reduction of the investor’s income tax

liability. Withdrawals from the Access policy are

treated as capital reductions and thus are not

subject to income tax, but subject to CGT.

ON DEATH No CGT, where policy is transferred to a nominat-

ed beneficiary. No executor’s fees where a benefi-

ciary is nominated. Policyholder proceeds are

transferable directly to the nominated beneficiar-

ies and therefore are not trapped as part of the

frozen assets in the deceased’s estate. Estate

duty may be applicable.

ASSET ALLOCATION WITHIN THIS INVESTMENT No limitation on local or offshore exposure.

Every investor’s risk tolerance will determine the

overall asset allocation.

THIS INVESTMENT IS ALSO AVAILABLE FOR DIRECT OFFSHORE INVESTMENTS.

TO SUMMARISE KEY ADVANTAGES

Tax on interest for wealthy individuals only 30%.

CGT reduced from 18% to 12% for individuals.

Tax on interest for Trusts are only 30%

(saving of 15%).

CGT reduced from 36% to 12% for individuals

(saving of 24%).

No executor’s fees for individuals

(saving of up to 3.5%).

Liquidity is available for unforeseen circumstances.

Full liquidity after five years but retaining the tax

advantages.

No limits on asset allocation.

THE SOONER ANY WEALTHY INDIVIDUAL OR TRUST

INVEST IN SUCH A VEHICLE – THE BIGGER THE

ADVANTAGE AND SAVING OVER TIME, IRRESPECTIVE

OF THE UNDERLYING ASSET ALLOCATION.


If we assume starting capital of roughly R5 million

invested in a balanced portfolio and 20% of returns are

of income nature and the balance is of capital nature –

investing in such a vehicle could have a difference of

roughly R2 million or more after ten years.

The biggest threat today consists of two things:

thanks to medical advancements people are living

longer, and inflation. Add tax to the equation and

without proper planning, one could be faced with

insufficient capital at retirement.

It is a bit naïve in view of the ongoing political uncer-

tainty in SA, and an economy that consists of less than

1% of the world economy to have all your invest-

ments in SA.

GET RID OF BAD DEBT, INVEST IN TAX EFFICIENT

INVESTMENTS THAT WILL PROVIDE INCOME FOR

PROLONGED PERIODS OF TIME, AND CREATE

LIQUIDITY FOR UNFORESEEN INVENTS.

TRUSTS AND WEALTHY INVESTORS SHOULD

CONSIDER TAX EFFICIENT VEHICLES AND LASTLY, IF

YOU ARE LUCKY ENOUGH TO AFFORD IT, TAKE AS

MUCH OF YOUR INVESTMENTS OFFSHORE.

ALL INVESTORS HAVE DIFFERENT OBJECTIVES,

INCOME NEEDS AND CIRCUMSTANCES.

SPEAK TO A QUALIFIED FINANCIAL PLANNER TO

ASSIST REDUCING TAX, USING ANY OF THE INVEST-

MENTS MENTIONED ABOVE WHERE APPLICABLE.

“In this world, nothing can be said to be certain, except

death and taxes.” Although true, the uncertainty of regular

tax changes and increases could have a severe impact on

personal wealth.

Benjamin Franklin

DISCLAIMER: Brenthurst Wealth Management is an authorized financial services provider Reg No 2004/012998/07 FSP No. 7833. This document should not be viewed as investment advice as each individual investor is different and has different investment needs. The information contained in this communication is for informative purposes only, and is not intended to constitute advice in any form. All information with regards to any legislation or tax restrictions, it is recommended to speak with your financial adviser.

JOHAN BURGER is head of financial planning at our Pretoria branch and a director of Brenthurst Wealth Management (Pty) Ltd.

Johan obtained a B.Com degree in Financial Management from the University of South Africa in 2004. Additional qualifications include two years at Lynn University in the USA where he qualified in International Business. Johan initially gained expe-rience at Interdynamics an Australian Risk Analyst Company. He joined Brenthurst Wealth in 2006 and completed his National Certificate in Wealth Management.

Johan is a CERTIFIED FINANCIAL PLANNER® professional, a member of the Financial Planning Institute of South Africa and is fully qualified to give advice on all investment matters.

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